Bob's Gutsy Leadership Blog

Nordstrom: Ignoring Its Fundamental Problems

Something unique happened last week. After many quarters of disappointment, Nordstrom actually beat the street’s estimate of earnings per share. Given this is the first piece of good news in quite a while, the stock price gained 10%, going from $26 to $28.50. On the other hand, that is still a far cry from the $65 per share level of a year ago.

Besides the good earnings per share number, how did the rest of the Q2 financials look? Here is the view of Bloomberg: “Practically everything else about this Q2 earnings report is worrisome for Nordstrom, and it indicates that something has seriously gone off track for this company.” Specifically, net sales fell -5.1% versus year ago, with the full-price division being off -6.5%, Nordstrom Rack down -1.9% and online sales up only +4%, its lowest growth rate in the past decade and way down versus the +17% of 2018 and +16% for 2017.

Looking longer term, the following from the Wall Street Journal of a few weeks ago captures another core problem, besides the recent disappointing revenue, that Nordstrom is facing: “From 2013 through 2018, Nordstrom earnings before interest and taxes fell 38%, while revenue climbed by nearly a third.” Net, it seems its cost structure is out of sync with its business model.

Today, roughly 1/3rd of their revenues comes from online sales, with the remaining split between its 118 traditional Nordstrom department stores and the 248 Nordstrom Rack stores. While analysts will praise Nordstrom in creating an online offering for it customers, and attempting to fight off the super successful TJMaxx and Ross in the midmarket-discounters retail segment via Nordstrom Rack, they scream regularly for not evolving the business model to reflect the massively different cost structures required to make money with the new configuration of online, its value-oriented Rack stores, and the full-price department stores.

Another example that makes you wonder if Nordstrom really realizes that now only about 1/3rd of its business is in its traditional stores is the upcoming opening of its new, seven-story, 320,00 square foot women’s store on West 57th Street in New York. In two months, Nordstrom executives and family members will descend on midtown Manhattan to christen one of the company’s largest and most ambitious projects in it 118-year history. The cost for this beauty is $500 million! For perspective, recently this area in Manhattan has experienced the retail departures of Lord & Taylor, Calvin Klein, Ralph Laruen, and Henri Bendel.

Because the Nordstrom management has ignored the fundamental issues, the financial penalties have been severe: Since 2009, the S&P Retail Index has gone up +157%, while the Nordstrom stock price is down -6%, Since January 1, 2019, the S&P Index is +17% and the Nordstrom is down -45%.